The disclosed invention relates generally to conducting online electronic auctions, and in particular to online electronic auctions featuring partial quantity evaluated rank bidding.
Traditional Procurement Models
Procurement of supplies traditionally has involved high transaction costs, especially information search costs. The introduction of electronic commerce introduced new methods of procurement that lower some of the transaction costs associated with procurement. Online procurement, or business-to-business electronic commerce, matches buyers and suppliers so that transactions can is take place electronically. There are three models for online procurement: catalog, buyer-bidding auction, and supplier-bidding auction.
The “catalog” model of online procurement was the first to be developed. The first electronic catalogs were developed by suppliers to help customers obtain information about products and order supplies electronically. These first electronic catalogs were single-source; i.e., they only allowed customers to obtain information and products from that supplier.
However, customers typically are not satisfied with being “locked in” to one supplier—they want to be able to compare a number of competing products to be sure of getting the product features they want, at the best price. So suppliers with single-source electronic catalogs started to include competitors' products on their systems. An example of this is American's SABRE system, which includes offerings from competing suppliers (airlines), thereby further reducing information search costs. By offering competing products, the electronic catalog that offers competitor's products becomes an “electronic market”.
Many of these systems are biased towards the supplier offering the electronic market. Procurement costs can be further lowered with an unbiased electronic market that promotes competition.
For standard products and services, the need to have an unbiased market has been met for many industries by third party “market makers.” For example, Inventory Locator Services compiled a database that lists all suppliers of airplane parts that have a certain item in stock. Potential buyers dial into the database to get information on the parts they need. Therefore, a third party, Inventory Locator Service, not a supplier, creates the unbiased electronic market.
The electronic catalog model of electronic commerce involves one buyer and one supplier at a time. When many buyers compete for the right to buy a standard product or service, a buyer-bidding auction model is created. A noteworthy example of the buyer-bidding auction model is the system operated by PriceLine.com and described in U.S. Pat. No. 5,794,207 issued to Walker et al. In this system, a potential buyer competes with other potential buyers for airline tickets by submitting a bid for an airline ticket on the PriceLine website. An airline can choose to accept a bid, thereby committing the buyer to buy the ticket.
The catalog and buyer-bidding auction types of electronic markets do not work in some situations, however. If the buyer requires a custom-made product, it is not possible for suppliers to publish a set in a catalog. Likewise, it is not possible for buyers to specify all of the details of the product they want to purchase in a buyer-bidding auction. Traditionally, when a company requires a custom industrial product, a buyer for the company searches for a potential supplier and acquires custom-tailored price quotes from a supplier for the needed custom product. The search is slow and somewhat random because it usually relies heavily on personal relationships. The costs associated with locating vendors, comparing their products, negotiating, and updating paperwork become big factors in a purchase decision. The cost of switching suppliers is very large, which means that the quoted price is probably not the lowest fair price and that it is difficult for a new supplier to enter the market.
As an alternative, buyers use auctions to save money. The assignee of the present application developed a system wherein suppliers downwardly bid against one another to achieve the lowest market price in a supplier-bidding auction.
Supplier-Bidding Auction
In a supplier-bidding auction, bid prices typically start high and move downward in a reverse-auction format as suppliers interact to establish a closing price. The auction marketplace is one-sided, i.e. one buyer and many potential suppliers. Typically, the products being purchased are components or materials. “Components” typically mean fabricated tangible pieces or parts that become part of assemblies of durable products. Example components include gears, bearings, appliance shelves, or door handles. “Materials” typically mean bulk quantities of raw materials that are further transformed into product. Example materials include corn syrup or sheet steel.
Industrial buyers typically do not purchase one component at a time. Rather, they purchase whole families of similar components. At times, components are strongly related to one another. As an example, a buyer might purchase a given plastic knob in two different colors, or might purchase a nameplate in four different languages. These parts are so similar that, by definition, they must be purchased from the same supplier—all of the knobs are made using the same mold. These items are therefore grouped into a single lot. Suppliers in industrial auctions must provide unit price quotes for all line items in a lot.
Auction Process
The process for a supplier-bidding auction is described below with reference to FIGS. 1 and 2. FIG. 1 illustrates the functional elements and entities in a supplier-bidding auction, while FIG. 2 is a process diagram that identifies the tasks performed by each of the involved entities.
The supplier-bidding auction model requires that buyer 10 to define the bidding product or service. An auction coordinator 20 works with buyer 10 to prepare for and conduct an auction and to define the potentially new supply relationships resulting from the auction.
As shown in FIG. 2, in the Initial Contact phase 102 of the auction process, the coordinator 20 contacts the buyer 10, and the buyer 10 provides data to the coordinator 20. The coordinator 20 prepares a specification 50 for each desired product or part 52. Once the product 52 is defined, potential suppliers 30 for the product are identified. The coordinator 20 and buyer 10 work together to compile this list of potential suppliers from suppliers already known to the buyer 10 as well as suppliers recommended by the coordinator 20.
The buyer 10 makes a decision regarding which potential suppliers 30 will receive invitations to the upcoming Auction. Suppliers 30 that accept Auction invitations are then sent notices regarding the upcoming Auction, as well as client software to install in preparation of participating in the Auction.
In the RFQ phase 104, the coordinator 20 works with the buyer 10 to prepare a Request for Quotation (“RFQ”) 54. The coordinator 20 collects and maintains the RFQ data provided by buyer 10, and then publishes the RFQ 54, and manages the published RFQ 54. The RFQ 54 includes specifications 50 for all of the parts 52 covered by the RFQ 54. In the RFQ 54, buyer 10 aggregates similar part or commodity line items into job “lots.” These lots allow suppliers 30 to bid on that portion of the business for which they are best suited.
During the auction 56, bids 58 will be taken against individual lots (and their constituent parts 52) within RFQ 54. While suppliers 30 must submit actual unit prices for all line items, the competition in an Auction is based on the aggregate value bid for lots. The aggregate value bid for a lot depends upon the level and mix of line item bids and the quantity for each line item. Therefore, suppliers 30 submit bids at the line item level, but compete on the lot level.
In the Auction Administration phase 106, coordinator 20 coordinates the Auction and administers the Auction setup and preparation. The coordinator 20 sends RFQ 54 to each participating supplier 30, and assists participating suppliers 30 with preparation for the Auction.
In the Auction phase 108, suppliers 30 submit bids 58 on the lots and monitor the progress of the bidding by the participating suppliers 30. The coordinator 20 assists, observes, and administers the Auction.
When the bidding period is over, the auction enters the Auction Results Administration phase 110. In this phase, coordinator 20 analyzes and administers the Auction results, which are viewed by buyer 10. The buyer 10 begins to conduct final qualification of the low bidding supplier(s). The buyer 10 retains the right not to award business to a low bidding supplier 30 based on final qualification results or other business concerns.
In the ensuing Contract Administration phase 112, the coordinator 20 facilitates settlements 60 awarded by the buyer 10 to suppliers 30. Contracts 52 are then drawn up between buyer 10 and suppliers 30.
Communications and Software
The Auction is conducted electronically between potential suppliers 30 at their respective remote sites and the coordinator 20 at its site. As shown in FIGS. 3 and 4, information is conveyed between the coordinator 20 and the suppliers 30 via a communications medium such as a network service provider 40 accessed by the participants through, for example, dial-up telephone connections using modems, or direct network connections. A computer software application is used to manage the Auction. The software application has two components: a client component 31 and a server component 23. The client component 31 operates on a computer at the site of each of the potential suppliers 30. Suppliers 30 make bids during the Auction using the client component 31. The bids are sent via the network service provider 40 to the site of the coordinator, where it is received by the server component 23 of the software application. The client component 31 includes software used to make a connection through telephone lines or the Internet to the server component 23. Bids 58 are submitted over this connection and updates are sent to connected suppliers.
Bids 58 can only be submitted using the client component 31 of the application—this ensures that buyers do not circumvent the bidding process, and that only invited suppliers participate in the bidding. Typically, bidders can see their bids and bids placed by other suppliers for each lot on the client component 31. When a bidder submits a bid, that bid is sent to the server component 23 and evaluated to determine whether the bid is from an authorized bidder, and whether the bid has exceeded a pre-determined maximum acceptable price. In a typical online auction, bids placed by a supplier-bidder are broadcast to all connected bidders thereby enabling every participating bidder to see quickly the change in market conditions and begin planning their competitive responses.
Auction Dynamics
Online electronic auctions provide a powerful interactive medium for creating and capitalizing upon traditional auction dynamics. The extensive reach is of online electronic auctions combined with inherent forms of anonymity make it an attractive choice for virtually any auction sale. Online electronic auctions enable potential bidders to view a rapidly changing auction landscape as hundreds of bids can easily be processed within a few hours.
A conventional online auction will typically display the then-current low bid in the market to all participants in the auction, even those participants who have not submitted bids, or those participants whose bids are far different than the market-leading bid. Conventional online auctions typically rely on the interaction between bidders that results from disclosing bids to drive the auction to the best possible bids. In circumstances where buyers have many potential suppliers, and suppliers are unlikely to be known to one another, displaying this information will stimulate the auctioning process.
However, displaying all bids to all auction participants, including the market-leading bid, may not be advantageous to the buyer in many situations.
One potential disadvantage of an auction that discloses bid values is the possibility of a leak. If all auction participants can view the market-leading bid, then a supplier could potentially leak this information to other buyers or to the news media or trade press. The effect of such a leak may induce a general reduction in market prices, which would confer the benefit of the auction to all buyers in the industry, thereby eliminating any advantage the buyer obtains from using the online auction.
For the same general reasons, suppliers may not want their bids disclosed to other suppliers. If the disclosure of prices from a single auction were to have the effect of reducing market prices for all similar products, suppliers would be reluctant to participate in the auction, or would be less aggressive in their participation in the auction.
In addition, traditional online auctions have not been appropriate for some industries because of the nature of the auction. Under certain market conditions, it has been advantageous for a buyer to conduct sealed bidding rather than online auctions, because sealed bidding has the benefit of hiding from the other bidders the value of the winning bid. This is helpful in circumstances where suppliers are known to collude with other suppliers or publish prices through trade publications.
Classical economic theory about the behavior of cartels suggests cartel members have the incentive to “cheat” or break ranks with the cartel when other cartel members cannot catch the offending member. A sealed bidding auction, or disguised price auction, facilitates a cartel member's ability to break ranks with the cartel, because other cartel members do not know the value of the winning bid. This feature of a sealed bidding auction frequently works to the buyer's benefit.
In traditional online auctions it has been hard to disguise the value of prices and prevent disclosure, while benefiting from the interactive dynamics of online auctions that typically result in lower prices for the buyer.
In addition, when bids are fully disclosed, bidding typically declines only marginally below than the “second best” prices offered in the market. Therefore, if the buyer expects the market-leading bid to be far lower than other bids, it can be to the buyer's advantage to prevent other bidders from seeing the market low bid. In classic auction theory, a low bidder tends to transfer more surplus to the buyer if the low bidder bids a greater spread below the second place bid. This can benefit buyers.
Therefore, under certain market conditions, it would be advantageous to conduct a “sealed bidding” online auction, where the value of the winning bid is hidden from other bidders.